Understanding Discretionary Income vs Disposable Income

Discretionary Income

What Is Discretionary Income?

It’s important to understand the difference between disposable income and discretionary income when it comes to working with your personal finances. Disposable income is the income left after deducting taxes from your gross income.

Discretionary income is a subset of disposable income and is the income left after further deducting all necessary expenses such as housing, food, transportation, and health care. With this remaining income, you have discretion on how you spend it, save it or invest it.

There are differing opinions about what should be included in necessary expenses. This list could vary from one person to another depending on their individual situations for example one person may have student loan debt where another person does not.discretionary income

In your own life, it’s important to manage the gap between disposable and discretionary income — the money you spend on “necessities” — and to put your discretionary income to use in a way that will benefit you in the long term. Food, shelter, transportation, and healthcare could all be considered necessities, but how much you spend on those will vary from person to person. Going out to eat in expensive restaurants five times a week is much different from buying food in bulk and preparing simple meals at home. Leasing a car is a much different economic proposition from buying one or relying on public transportation.

Each person will make those spending decisions for himself or herself and then decide what to do with the discretionary income left after providing “necessities.” If you’re planning for your future, saving and investing are two great options for some of this money. Saving won’t get you a very big return on your money, but investing in stocks with money you won’t need in the next few years could set you up for a more financially secure future, and investing is not just for people with lots of money already.
– via The Motley Fool

Salary Does Not Always Determine Discretionary Income

The issue of discretionary income is pivotal when it comes to your ultimate ability to improve your overall financial picture. Your choices absolutely impact your discretionary income so the more you learn about this concept to get down to the actual number in your situation the better.

When you know what your discretionary income is and you know what your necessary expenses are, you can evaluate your necessary expenses to see if you can make changes to increase your discretionary income.

You may be surprised to know that an increase in salary does not necessarily mean an increase in discretionary income. Here is a great discussion of that aspect of discretionary income.

Lower Salary Can Equal Higher Discretionary Income

In California, even though his salary was higher, he spent more than half of his monthly income on a rented one bedroom apartment located far from his work. His family spent more on utilities, as well as on transportation and groceries. Now they live in a two-bedroom townhouse with a fenced yard, and it costs less than a third of what they paid in California. He doesn’t have to drive as far to get to work, saving them money on gas, and food and utilities are less expensive. Indeed, once we pointed it out to him, my husband’s cousin realized that in California, even though he made more, his family spent every penny on the basics of survival. Here, his salary is smaller, but he has more discretionary income to do things he enjoys: going to a movie occasionally, or going out to eat. Plus, his family’s house is the best he’s lived in since he married his wife.

Before you go off chasing a higher salary, consider the area. It could be that you enjoy a better quality of life, even with a lower salary. Salary isn’t the be all and end all of income.
– via MoneyNing

Are there changes you can make to increase your discretionary income?

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